Refinancing Risk and Cash Holdings

ABSTRACT

We find that firms mitigate refinancing risk by increasing their cash holdings and saving cash from cash flows. The maturity
of firms’ long‐term debt has shortened markedly, and this shortening explains a large fraction of the increase in cash holdings
over time. Consistent with the inference that cash reserves are particularly valuable for firms with refinancing risk, we
document that the value of these reserves is higher for such firms and that they mitigate underinvestment problems. Our findings
imply that refinancing risk is a key determinant of cash holdings and highlight the interdependence of a firm's financial
policy decisions.